All right, looks like we're on here. Hey everybody, for those of you who don't know me, my name is Matt Koranda. I'm the Senior Research Analyst and Managing Director covering consumer growth at Roth MKM. Joining us for a fireside chat, this morning we have FIGS, and from FIGS we have Daniella Turenshine, CFO. Just going to give a quick preamble on FIGS and then we'll, we'll kick it over to Daniella, for the main event here. But they're, for our coverage, they're a buy-rated, $850 million market cap. We have a $7.50 price target on the name. They're a disruptor in the medical apparel space. They generated close to $550 million in revenue last year. And they're a leading brand, with a very large total addressable market.
Healthy unit economics that we think make it an excellent e-com first brand, with a great normalized EBITDA margin profile, historically in the mid- to high-teens. Really healthy balance sheet, no debt, $240 million in cash. They're going through a transitional year in 2024, which we're going to explore. And this is their third year as a public company. So without further ado, I'll introduce Daniella. And she's going to take us through just a brief history of FIGS and maybe just touch on what differentiates you guys versus other medical apparel players in the space.
Thank you so much, Matt. You know, we really disrupted the healthcare apparel market by bringing technical, functional fabrications to bringing comfort and fit and fashion to an industry where that didn't really exist before. I think what really separates us from others in the space is, you know, a few things. I think first and foremost is product innovation. Our proprietary fabrication for our scrubwear, FIONx, is technical. It has four-way stretch. It's anti-odor. It's moisture-wicking. It really is made to run around a hospital with our healthcare professionals and serve them in their day-to-day needs. We're also really focused on how we extend our layering system and how we serve healthcare professionals to work, at work, and from work. As part of that, you know, our non-scrubwear business, about 20% of our business today, a lot of opportunity for us to grow within there.
I think that's, you know, first and foremost, one of the things that really sets us apart from everyone else is really being at the forefront of product innovation. I think secondly, brand authenticity. We've created a community around a profession that didn't exist before. And we really aim to, you know, tell our customers that we get them and we got them and we understand what they're going through. And we do that through our marketing. We do that through our events and activations where we engage with them in real life. And we do that for our advocacy as well. We have an Awesome Humans Bill where we aim to, you know, fight alongside our healthcare workers for better pay, better working conditions, better, you know, nurse-to-patient ratios. I think third, we have the scale. So we are multiples larger than the closest D2C competitor.
And I think that really enables us to continue to invest in, in marketing, continue to invest in product innovation, and building that community and really, widen the moat between us and everyone else. And, and finally, as you touched on, just a really strong financial profile. We have $250 million in cash, no debt. We're profitable. We have the ability to invest behind our growth levers and, and really just continue to widen that moat.
Okay, very helpful. So I want to talk about fourth quarter and then the outlook for 2024 because it's, there's been a bit of a slowdown, at least in terms of the implied growth that we're seeing for 2024, in scrubwear. So maybe just give some context for us in terms of why we're seeing the slowdown that we have in the fourth quarter. And then, you know, maybe just talk about your core demographic and the headwinds that they're experiencing that sort of put into context the low single-digit negative growth outlook that you gave on the top line for 2024.
Yeah, I think this is really reflective of a point in time. And I think there's a few factors in the environment that, you know, have us being cautious in our outlook. And also, you know, we're impacting the fourth quarter. I think first and foremost is just the macro environment. We serve a really diverse range of healthcare professionals. Two-thirds of our customers make less than $100,000. So they are impacted by the inflationary environment they are in that we're in, by food prices being 20% higher than they have been, by interest rates being where they are. And so that is, you know, that's definitely having an impact on our consumer today. I think secondly, they're still feeling the aftereffects of COVID. Fatigue and stress are weighing on our healthcare professionals, and it's impacting their purchasing decisions.
Finally, you know, we saw a really large acceleration in frequency during the pandemic. So we're still working through kind of that replacement cycle. They're stretching their dollar because of the macro environment. They're making their scrubs last longer. We do think at some point there's going to be an inflection point there where, you know, they need to repurchase at the same frequency that they did before. But I think all of those things are kind of interweaving in the environment we're in today.
Okay. Helpful context. And then maybe just touch on some of the elements that enable a return to growth, right? Not asking for timing here necessarily, but, you know, there's some things that are probably out of your control, like a better macro, you know, maybe waiting for, you know, medical professionals, scrubs that they bought during the pandemic to wear out and the repurchase cycle to kick in. But I think you do have some self-help levers that maybe you can address for us, which is, you know, the Teams initiative, which is a professional sales initiative that you have, the store buildout that you're going through, international growth. Maybe just talk about some of the levers that you have at your disposal to drive growth in the near term.
Yeah, I'll start by addressing kind of maybe the things outside of our control that we do think will be really impactful. The healthcare apparel the healthcare industry, is growing. Healthcare jobs are expected to be 45% of job growth over the next five years. And I think right now we're experiencing some kind of supply and demand imbalance. But over the long term, you know, the system needs to right-size that. And we're seeing kind of early initiatives underway with, you know, hospitals and providers aimed at better pay, at better working conditions. But, you know, healthcare professionals are the backbone of our society, and, and they're not going anywhere. So I think there's a lot of long-term trends there. I, I guess, again, right, can't predict exactly when that inflection point will happen.
I think when we look within our own drivers, first and foremost, I think within our core segment, we have, you know, a ton of runway. We're about looking at our active customer base, about 10% of healthcare professionals in the U.S. So we have the opportunity to add more FIGS customers to our community. We're really looking to shift more of our marketing spend into top-of-funnel initiatives, into brand marketing, out-of-home commercials to really drive that awareness, and also to drive share of wallet. So, you know, focusing on product innovation, focusing on extending our layering system, focusing on providing solutions-based products for our healthcare professionals, as we always have, to really expand, you know, what they're spending with us. And then we have some of our more nascent growth strategies, which is international TEAMS and retail. International is about 12% of our business today, growing very quickly.
Opportunity there, you know, expanding in the markets that we're in today by really focusing on localization, by speaking to customers in their own language, by marketing to them, utilizing their holidays, focusing our product portfolio on what's most relevant by market, but also expanding into new markets. In 2023, we opened 10 new markets. We saw a lot of success, two standouts from Mexico and the Philippines, where we really saw that that demand was already there. We saw the organic traffic to our site, and a lot of the brand building that we've done in the US, has extended to other markets. And so we're going to selectively turn on new regions, where we're seeing that strong demand. TEAMS is our business where we're, you know, selling. It's our B2B business where we're selling to hospitals and institutions that are buying on behalf of their employees.
It's about 15% of the overall markets, mid-single digits of our business today. Seeing a lot of strong tailwinds there as, you know, we shift into this more consumerization of medicine, where some of these smaller kind of concierge clinics, think One Medical, Next Health, fertility, vet, are really focused on the patient experience. And as part of that, they want to standardize and professionalize their workforce. And there's just a really strong alignment with FIGS' business is entirely inbound today. It's growing really quickly. We're going to fuel that even further with outbound. So looking to, explore into digital marketing for, you know, smaller private practices with really high intent, but also a small outbound sales team to really go after this concierge segment. And then finally, retail. We have one retail store open in Century City at the end of last year.
We're going to be opening a second in Philadelphia, in summer of this year. You know, as you can imagine, we're an apparel company. People want to touch and feel the product. It's also a space for them to really engage with, you know, other people in the healthcare space. We call them community hubs. It's about engaging with the brand, but also engaging with each other. You know, we're really testing and learning, but we think it's a big opportunity, to reach people that we're not, you know, speaking to today, being entirely e-commerce. A lot of levers to pull ahead.
Okay, a lot of levers and a million follow-ups that I have to add. Maybe I'll just try to bucket it into, like, three distinct follow-ups here. So on the teams front, when do we flip to outbound? Maybe just talk about the timing of that and how that could help us in 2024. On the international front, about 12% of your business right now. What's the right indexation in terms of where it should be over time? And then maybe on the store buildout, beyond Philly, you know, how should we think about store growth and our desire to you know, penetrate further into that store expansion?
A three-part question. So starting with TEAMS, yeah, entirely inbound today. I think so we started at the end of last year, beginning of this year, Open Access, which enabled us to upgrade our technology so that we were serving healthcare institutions of all sizes. I think a big part of this market is smaller healthcare institutions, like private practices. And so, we just launched the functionality for us to be able to serve them. And so very quickly, we're going to be looking at digital marketing and how we can, you know, more quickly grow that. Looking at an outbound sales team, I think it's, it's something that we're looking to hire early in the year, but also acknowledging that there is, you know, a sales cycle to this. And so really probably going to start to reap the benefits of that later into 2024. International.
So 12% today, of our business, growing 40%-50%, really strong growth that we're seeing. I think, you know, over the long term, we still think we're, we're just getting started in the U.S. So a lot of room to grow and penetrate there. But it's grown about, you know, 2% over, over the past each year, over the past several years. We think that's a good growth rate. And ultimately, we'll be dependent on the number of markets we open, the penetration in our existing markets, and also the growth within the U.S. business. But, you know, we are 0% penetrated in international today. So, so much opportunity. And then with retail. So, you know, we really want to test and learn from these first stores before we, really roll out kind of a, a larger rollout plan.
We really are aiming to build these stores in a way that's profitable and sustainable. They're not, you know, marketing investments for us. We're really excited by what we're seeing kind of early days in Century City, in our first location. 40% of customers are actually new customers, which is really great to see, given that Los Angeles is probably our most penetrated kind of repeat customer market. So I really do think it's an opportunity for us to serve people that really want to try on and touch and feel the product before, you know, making a purchase. But I think there's much more opportunity for us in the future, and it's something that we're really going to leverage the insights that we get from Century City and Philadelphia to determine, you know, what that optimal cadence looks like.
Yeah, okay, very helpful. Wondered if we could just touch on the promotional environment, just in the context of, hey, your end user is experiencing some economic pain and some headwinds. So maybe just talk about our posture this year versus last year, how we're thinking about maybe promoting differently. And then, you know, how are others in the space responding as well? Because I imagine you guys being the DTC leader, seeing some headwinds. There's got to be, you know, quite a bit more pain down the line for a lot of the smaller upstarts.
Yeah.
How are they responding from a promotional standpoint as well?
Yeah, so starting with us, you know, we're aiming to keep the promotional cadence pretty similar to what we did the prior year. I do think there will, you know, we were working through a larger inventory balance last year, so I do think the depth of inventory that we have on promotions will look different this year. But in terms of number of events, discount rate, we're aiming to keep it fairly similar. In this environment, we are seeing some mix shift from our consumers into these more promotional times. But I think for us, we're really focused on protecting the health of the brand over the long term, so we're not looking to be more promotional. We have a really low discount rate for apparel.
I think stemming from the fact that we sell a non-seasonal product, it's year-round, we don't need to do kind of end-of-season sales to work through inventory. So I think we see a lot of benefits there. But yeah, protecting the health of the brand over the long term is our number one priority. I think we also just aim to be every day affordable and accessible for our healthcare community. Top is $38, pants are $46-$48. So, you know, really, we want to be able to serve this community in any, you know, throughout the year. I think in terms of our competitors, I think they are more competing in kind of a low-cost, low-quality space, and so they just generally are more promotional than us.
I think that's something that we're going to continue to see, but it doesn't really impact how we're thinking about our calendar and our cadence.
Okay, got it. And then maybe just, for the benefit of folks who are trying to model out growth this year, you touched on Q1 being negative year-over-year, and then I think Q3 having the biggest sort of headwind because of the sample sale that you ran last year. Maybe just touch on cadence of revenue and seasonality this year.
Yeah, so, we expect Q1 to be down low single digits. Q3, we are lapping a really large event that we did in the prior year, our sample sale. Just from a depth of inventory perspective, we're not expecting to have that much availability to be able to comp it in that way. So we are, just calling out that we are expecting Q3 to be the most pressured, in that regard. And I'd say, like, there isn't at this point where we stand today, of course, we're going to update as we go throughout the year and learn more, but Q2 and Q4 seem, you know, fairly normalized. There isn't any big events or big marketing or, you know, launches to speak to.
Okay, all right, helpful. And then one of the other big initiatives you guys are undertaking is distribution and, and sort of a remake of your distribution profile. So maybe just talk about the distribution project that you're undertaking, that's been ongoing for the last, call it, I don't know, 6-12 months, and, and we'll be going through 2024. Anything you can share with us in terms of timing and key milestones with that distribution project that you're, you're going through, and then what are the key improvements that are coming out of that?
So we're transitioning to a new 3PL provider, and as part of that, we're moving from our facility today that's outside of Los Angeles to a new facility that is no longer in California. We think that this new provider is ultimately going to, you know, just enable us to have better flexibility, reliability, efficiency, offer a better customer experience, and I think perhaps most importantly, really enable us to scale from here. I think we have a lot of opportunity over the long term as we think about international distribution. We're supporting this business today with one distribution center located in the U.S., and so a lot of opportunity as we think about future profitability to expand our distribution network, which this is really going to be kind of the first steps to doing that.
As part of this, we are going to be operating two facilities in tandem as we make that transition. There is going to be $14 million of kind of transitory expenses associated with that, which is about 250 basis points. We expect that to be really felt between the first quarter and the third quarter, as this transition will happen, you know, somewhere at the end of Q2 to Q3. The largest impact of that will be in the second quarter of this year. I think when we look at, kind of other things within fulfillment, you know, we have those transitory expenses for 250 basis points. The ongoing costs of the new facility are going to be more expensive upfront, but really, going to provide us that efficiency, scale, and reliability that we spoke to.
That's going to be offset by moving off some of the excess storage facilities that we utilized really in the first three quarters of last year to, you know, house some of the excess inventory that we pulled forward. So net-net, we are expecting deleverage in selling this year as a result of those factors. And we spoke in Q1 that selling deleverage being about 70 basis points from all of the puts and takes, but larger throughout the full year, you know, 250 basis points of the transitory expenses looking at the full year.
Okay, all right, great. And then maybe just as we look into 2025, I guess the knee-jerk reaction would be, okay, you get a bunch of leverage right after that, but you mentioned some ongoing costs right after, implementations. Maybe just talk about how those costs roll off over time and, and when we expect leverage in that on that line.
Looking at 2025, we are expecting a lot of leverage in the fulfillment line item. Those 250 basis points of transitory expenses will largely go away. So looking at, you know, selling as a % of sales, we expect 2025 to be pretty in line with what we saw in 2023. We think that's a good kind of basis to start modeling off of.
Okay, great. On the marketing front, you guys actually got quite a bit more efficient in 2023 if I look at it like on a unitized basis per order. Maybe just talk about why that was the case in such a tough consumer environment. What did you do right? And then just any, any different plan for, for how we're going to spend. You mentioned sort of some more top of funnel, so maybe, maybe we should look for less efficiency this coming year. But maybe just speak to us about the puts and takes there.
Yeah, we always aim to be really disciplined and efficient in our marketing. I think that is, you know, something our marketing spend for a D2C company is definitely something that sets us apart. We aim to be around 15%-ish of sales. I think last year we were kind of leveraging some more bottom-of-the-funnel conversion tactics, and we do want to shift some of our spend into more top-of-funnel brand marketing, commercials, activations like we spoke about earlier. And as a result, there is, you know, there's a different payback period associated with that. And so we're not expecting marketing to, you know, change considerably, but that is a, you know, a factor in our outlook as we think about the longer payback associated with some of these investments.
Okay, great. All right, we've got time for maybe just a couple more here. In terms of the G&A leverage that we should expect here, you guys have been investing into that line and just building the infrastructure to scale the brand. Maybe just talk to us about how we're investing, you know, where do we see opportunities for investment in G&A? Should we expect that to grow, you know, sort of in line with revenue for the next couple of years, or do we see some leverage opportunities on G&A?
Yeah, I think in the near term, it's really important for us to continue to invest in growth. So we have, you know, we're going to continue to invest in building out our TEAMS team. We spoke about an outbound sales force in international, in retail, in technology, in product innovation. And we want to, you know, the top line, I think this year might be a little choppy, but I think it's incredibly important for us to continue to invest in the things that are going to drive growth over the long term. And we have the balance sheet to do it. We have the cash position to do it. And that's really going to continue to be a focus.
I think, like always, we're going to be very disciplined in being really lean in the places that we don't think are instrumental to long-term growth and just continuing to find the right balance there. Over the long term, though, I think a ton of opportunity to leverage G&A as top line accelerates.
Yeah, okay. We mentioned it a couple times, but I'll just make a finer point on it. $245 million in cash, that's like over $1.30 a share on a, what is it today, maybe around $5 a share in, for your stock. So maybe, and, and then, you know, beyond that, this year, I'm projecting some reasonable cash flow this year as you kind of flush through some more inventory. So just any thoughts on, on allocation and, and how we allocate that cash because it's, it's a pretty large balance?
I think our number one priority is investing back in the business, and we're going to continue to do that. We spoke about our distribution project, technology investments as we ensure that we have the best digital experience, and also retail, as we build that out over the future. I think to the extent that we have excess cash, to the extent that our share price continues to, you know, be under where we see is really the long-term potential, I think we'll definitely explore a buyback as well, but want to ensure that we have the ability to continue to invest in the business over the long term.
Okay, great. And we have a, like a little over a minute left, but, you also hit us with the news on the last quarter that you'll be leaving. So maybe just address sort of, you know, rationale. It seems like FIGS is set up for such a, you know, a great couple of years after this transitional year. You know, why leave now? What, what's the opportunity on your end?
Yeah, it's definitely a bittersweet decision. I've been with FIGS for five and a half years now. So I joined the company when we were doing about $50 million of sales, and it's been a really amazing experience to grow and scale to the $550 million that we're at today. I think for me, I'm joining a private equity portfolio company, so I wanted to try a new and different challenge and spend more time digging into the operations and really leaning into the business. But it was a very hard decision as I work with amazing and talented people, and I, you know, I think there's such a strong runway of growth ahead of FIGS.
Okay, and with that, we're perfectly out of time. So thank you, Daniella. Appreciate it.